2010 (11) TMI 440 - AT - Income Tax

Addition - Capital asset as defined in s. 2(14) - As per the Circular Nos. SO-10 and SO-1302 issued by the Central Government which has also been verified by the AO the municipal limit in the case of Samalkha is the area upto a distance of 5 kms. from the municipal limit in all directions - As per the circular mentioned above the area outside a distance of 5 kms. from the municipal limit will not be taken within the meaning of capital asset as defined in s. 2(14) of the IT Act. The AO has nowhere brought on record that the land is within 5 kms. from the municipal limit - The report of the Tehsildar dt. 24th Feb., 2006 clearly mentioned that the land was situated approx. 6.5 kms. from the municipal limit of Tehsil Samalkha - The AO did not controvert this fact and has not brought on record any material that the land is within 5 kms. from municipal limit - Thus, the appeal filed by the Revenue is dismissed.

Summary

Issues:
Appeal against deletion of addition of capital gains on the sale of land.

Analysis:
The main issue in this case was the deletion of the addition of Rs. 34,78,055 made by the Assessing Officer (AO) on account of capital gains on the sale of land. The AO relied on the reply of the Tehsildar to hold that the land was within the municipal area and hence liable for capital gains tax. However, the Appellate Tribunal noted that the land was situated approximately 6.5 kms from the municipal limit, as confirmed by the Tehsildar's report. The Appellate Tribunal referred to the definition of 'capital asset' under section 2(14) of the Income Tax Act and concluded that the land did not fall within the purview of capital asset as defined in the Act. Therefore, the capital gains arising from the sale of the land were not taxable.

Upon the assessee's appeal, the Commissioner of Income Tax (Appeals) considered the submissions, circulars, and reports. The CIT(A) noted that the municipal limit in the case was up to a distance of 5 kms from the municipal limit in all directions. The AO's report and the Tehsildar's confirmation that the land was around 6.5 kms from the municipal limit supported the appellant's claim. The CIT(A) referred to the notification issued by the Central Government and concluded that the land did not qualify as a capital asset under section 2(14) of the IT Act. The CIT(A) allowed the appeal and deleted the addition made by the AO.

The Appellate Tribunal, after hearing both parties and examining the records, upheld the CIT(A)'s order. The Tribunal found that the AO did not provide any evidence to show that the land was within 5 kms from the municipal limit, as required by the definition of 'capital asset.' Therefore, the Tribunal dismissed the Revenue's appeal and upheld the decision to delete the addition of capital gains on the sale of land.